Financier criticizes banker pay

From today's Money & Investing section of the Wall Street Journal, a small article with quite some significance.

Guy Hands of Terra Criticizes Banker Pay


By JAMES MAWSON

Guy Hands, founder of buyout firm Terra Firma Capital Partners, questioned banker pay and warned globalization is delivering a "massive transfer of economic power from the west to the east" in his annual letter to investors.

The firm's entry as first hit on google result page: Terra Firma, the Private Equity firm. Rather self-assured, calling itself the firm. Its webpage has this logo: We aim to be the leading contrarian investment firm, responsibly delivering superior returns over the long term.’



Mr. Hands, who each year sends a topical book to investors, this year picked economist Roger Bootle's "The Trouble with Markets." His Christmas letter accompanying the book also criticized how bankers are remunerated.

Finally, someone not a politician making sense on this issue.


It said: "It cannot be right to continue with a system which allows risk to be taken in the knowledge that, if things go right, bankers will take on average 60% to 80% of the profits generated through compensation and, if they go wrong, shareholders and ultimately the Government will pick up the costs."

And the government is also to blame: not just Lehman should have been allowed to fail. More, firms such as Citigroup should never have been allowed to get that big.


Mr. Hands also was pessimistic about the U.K. and the West, having moved offshore from the U.K. to the Channel Islands earlier in the year: "We need to question the accepted wisdom that a truly global market benefits all citizens in western developed nations. Indeed, I suspect we will, in time, see globalization as the driver that delivered a massive transfer of economic power from the west to the east."

Didn't that happen with petrodollars?


Terra Firma struck its first Australian deal earlier in the year, having bought Consolidated Pastoral, and was optimistic about its portfolio, including music company EMI Group.

They might be finally gettin' it

“It’s kind of like we all went overboard,” said Ms. Taylor, 33. “And we’re trying to get back to where we should have been.”

Kind of like.

It is a sign of the times when Sacha Taylor, a fixture on the charity circuit in this gala-happy city, digs out a 10-year-old dress to wear to a recent society party.

Behind the Curtain at G.E.

So this is what it has come to. General Electric appears to be in trouble.

I bought it at $22.50, soon after Warren Buffett bought preferred shares. GE is now at 7 bucks a share. The bears are pummeling it, warning of defaults, of it losing its AAA rating, that GE Capital is going to hit the wall.

Earlier in the week Jeffrey Immelt, the chief executive, released his annual letter to shareholders, pointing out that the company had $18 billion in profit last year. Investors shrugged.

Last year doesn't count.

“It has too much debt and not enough tangible common equity,” holds a bear, Charles Ortel. Tangible common equity — equity minus good will and other intangibles — is the once obscure, now critical barometer of a bank’s capital.

last night I saw a commercial for GMAC Bank. Bank? It's a finance company, yet it has become a bank. GE Capital appears to have similarly morphed into a bank.

“The last time G.E. cut its dividend was during the Great Depression,” Jerry Useem, who used to cover G.E. for Fortune magazine, pointed out. He was quiet for a minute. Then he added, “If G.E. is in trouble, God help us all.”

GM: 'Substantial doubt' about survival

Guess which way the market is going, based on this story: GM: 'Substantial doubt' about survival

CNNMoney.com - 4 hours ago

Automaker's annual report says it hopes to get $7.7 billion from the government to remain viable. By Chris Isidore and Ben Rooney, CNNMoney.

GM, auditor express doubts over survival MarketWatch

'Substantial doubt' for GM future BBC News

This way:

Rinden homenaje a soldados decapitados

Among the decapitated bodies found in Chilpancingo, Guerrero, Mejico, just a couple of days ago, were military.

This item appeared in ElUniversal.com.mx: Autoridades militares y civiles rindieron esta mañana, en la 35 Zona militar, un homenaje a los siete efectivos del Ejército mexicano cuyos cuerpos fueron localizados decapitados en esta ciudad la madrugada de ayer.

We passed through Chilpancingo, both on the way to, and on the way back from, Taxco, travelling from Zihuatanejo. Small connection, yet a connection nevertheless. Small, indeed: the highway passing through Chilpnacingo was more a boulevard (as I know such from the NYC area) than a parkway or an expressway. Yet our travels and travails in and through the State of Guerrero are significant enough to me that any and everything connected with that trip are significant.

Los secretarios de Gobernación, Fernando Gómez Mont, y de la Defensa Nacional, Guillermo Galván, así como otros funcionarios participaron en la ceremonia en honor de los ocho militares ultimados en Guerrero; advierten reto del crimen a las instituciones

I'm impressed by the faces of the soldiers guarding the coffins of their comrades: closest to camera (on the right), the soldier is sneaking a look; his next two comrades are definatly proud; the next two are somewhere between resigned and observant; then there are the simply soldierly.

But think: a bunch of their fellow soldados have been found decapitated, their headless bodies swinging from a bridge; what are these soldiers thinking? There is no fear that I can detect. There is pride, there is defiance, there is courage, but no fear.

I can not fathom such stoicism, such courage.

Once we were stopped at a military checkpoint on our way. Then, and in every other encounter I had with military and police in Mexico, I found nothing other than utter respect and affection for the uniformed; they were unfailingly polite, friendly, forthcoming and reassuring in their presence and behaviour.

That suffices to explain my regard for, and opinion of, them. Descansen en paz.

How the Fed Reached Out to Lehman

Lehman's failure remains a gaggle of unanswered questions, unresolved issues and doubts.

In the early hours of Sept. 15, after the government refused to rescue the foundering Lehman Brothers, something odd happened. The Federal Reserve lent tens of billions of dollars to a subsidiary of the newly bankrupt bank. In other words, government officials who had refused to risk taxpayers’ money on Lehman before it collapsed did just that after it collapsed.

Why was Lehman not rescued? Why was Bear rescued?

Many people, at least on Wall Street, have come to view the decision to let Lehman die as one of the biggest blunders in this whole financial crisis. Christine Lagarde, France’s finance minister, called the decision “a genuine error.” Judge James Peck, who approved the sale of Lehman’s carcass to Barclays, the British bank, said it was a shame that Lehman had failed.

Excellent point.

The authorities are investigating whether Lehman executives misled investors about the firm’s financial condition before the firm failed. But the authorities might be asking similar questions about executives at other banks if, like Lehman, those institutions had been allowed to go under.

Why was the money lent? Twice?

The recently disclosed documents detailing the Fed’s loan to Lehman’s subsidiary cast some light on a failed effort to prevent Lehman’s implosion from cascading through the financial system. The loan, according to these documents, was a “carefully thought-out decision” to stabilize the market by propping up Lehman’s broker-dealer business, called LBI New York, so it could stay afloat long enough to “facilitate an orderly wind-down” of tens of thousands of trades with the other Wall Street firms. The unit was kept out of the Lehman bankruptcy.

Good reasoning, but the implosion did cascade; many people got scared, petrified, and things got ugly.

People involved in the process said that the Fed only lent the money as part of “an orderly wind-down,” which would have been different from lending money to an ongoing, or in this case, insolvent concern.

Key point.

Cost of bailout(s)

Another day, another bailout. So, what is the cost, thus far?

First, the Fed:

Since early August 2007, the Fed's balance sheet has grown from $851 billion to $2.245 trillion as it has created rescue programs such as the commercial-paper facility. In addition, it has drawn down its stockpile of safe Treasury securities from $791 billion to $476 billion to finance programs and lent out $185 billion of Treasury securities to Wall Street firms in exchange for riskier securities. In all, the central bank has already committed about $1.9 trillion to support financial markets ...

$2.245 trillion - $851 billion = $1.394 trillion
791 billion - $476 billion = $ 315 billion
$ 185 billion
$ 1.894 trillion

Though the Fed has written down $2 billion on loans to Bear Stearns, Fed officials consider its programs to be well-secured. It is also earning interest and fees.

Two billion is such a small number in this context.

Next, Treasury:

All together, that's $398 billion invested by the Treasury so far. The Treasury is also sure to tap another $350 billion available to the TARP through funds approved by Congress in October.

HUD:

The Department of Housing and Urban Development has pledged to commit $300 billion to help homeowners avoid foreclosure.

BROADER PLEDGES: Adding together rescue money already explicitly committed by the Treasury and Fed brings the dollars spent, loaned or invested to date to $2.3 trillion, a number that is sure to grow and doesn't count fiscal stimulus.

The numbers get much larger when one considers the size of some markets the government has pledged to support. The Treasury has a program to backstop $3 trillion worth of money-market mutual funds. (It hasn't had to tap any funds so far to honor that commitment and has reaped about $800 million in fees on it.)

The Federal Deposit Insurance Corp. is in line to guarantee as much as $700 billion worth of bank debt, according to FDIC estimates. It has also substantially expanded bank-deposit insurance. The Fed is standing behind $1.3 trillion in commercial paper. Various agencies are helping Citigroup to backstop $306 billion in investments.

And counting.

Ecuador to default

President Rafael Correa, lawyer, leftist, friend of Hugo Chavez and Evo Morales, deliberately set his nation on a course to default on foreign debt. Spewing standard leftist rhetoric, he called such debt immoral.

"Correa is really, really convinced foreign debt is like the devil and he doesn't have to pay," says Alberto Bernal, head of emerging-market macroeconomic strategy at Bulltick Capital Markets in Miami. "There's a strong ideological component here."

Great name: Bulltick. Outside the acronym-happy world of finance it might be associated with bull droppings; it is meant otherwise.

Investors said the main impact of Ecuador's move would be to make money managers even more pessimistic than they already are about the prospects of countries like Argentina and Venezuela. Together with Ecuador, these countries are considered exceptional cases within the broader group of emerging-market borrowers because of their unorthodox economic policies.

Interesting choice of words: unorthodox.

Claudio Loser, president of Centennial Group Latin America consultants and formerly the International Monetary Fund's chief for Latin America, said he didn't think there would be too much contagion, outside of Argentina and Venezuela. "Markets have already discriminated between Ecuador and other countries," he said. With less than $4 billion in global bonds outstanding, Ecuador isn't a major player in global markets.

It does have the money to make the payment just past due ($30.6 million), but the gesture is meant as defiance, an ideological flourish aimed as much to his country's population as to what he calls real monsters.

The Andean country of 14 million is volatile even by Latin American standards. It previously defaulted on its debt in 1999. Ecuador went through seven presidents in the decade prior to Mr. Correa's ascension in January 2007. One of the presidents, Abdala Bucaram, recorded an album called "The Madman Who Loves" while in office. He was deposed by congress for "mental incapacity."

It does make Italy look stable in comparison.

Mr. Correa ... was educated at the University of Illinois.

Interesting choice of colleges.

"I think President Correa thinks the country should default pre-emptively, not when it's in fiscal distress, because it maximizes their bargaining power," says Alberto Ramos, an economist at Goldman Sachs.

P


President Rafael Correa said Ecuador would skip a $30.6 million payment to bondholders due on Monday, calling foreign creditors 'real monsters.'

Workers Pay for Debacle at Tribune

One man plays, many pay.

Sam Zell acknowledged from the start that his deal for the Tribune Company was flawed. But just how hellish this deal was, particularly for Tribune employees, became painfully clear on Monday when the 161-year-old company filed for bankruptcy.

This is the Zell who was a wizard in real estate. But this time he didn't do well. Or maybe he did; what is doubtless is that workers got screwed royally.

Mr. Zell financed much of his deal’s $13 billion of debt by borrowing against part of the future of his employees’ pension plan and taking a huge tax advantage. Tribune employees ended up with equity, and now they will probably be left with very little. (The good news: any pension money put aside before the deal remains for the employees.)

How is it possible for an investor to borrow against the pension of workers? Well, it is legal, even if utterly unethical. The workers wound up having their future pension exchanged for equity in a company that is now bankrupt because Zell messed up.

Yet there is more blame to hand out. Zell isn't the only vulture in this deal.

With one of the grand old names of American journalism now confronting an uncertain future, it is worth remembering all the people who mismanaged the company before hand and helped orchestrate this ill-fated deal — and made a lot of money in the process. They include members of the Tribune board, the company’s management and the bankers who walked away with millions of dollars for financing and advising on a transaction that many of them knew, or should have known, could end in ruin.

Ah, investment bankers, the very ones that are now getting government bailout cash. Nice work if you can get it.

It was Tribune’s board that sold the company to Mr. Zell — and allowed him to use the employee’s pension plan to do so. Despite early resistance, Dennis J. FitzSimons, then the company’s chief executive, backed the plan. He was paid about $17.7 million in severance and other payments. The sale also bought all the shares he owned — $23.8 million worth. The day he left, he said in a note to employees that “completing this ‘going private’ transaction is a great outcome for our shareholders, employees and customers.”

So the then-CEO got 45 million dollars. Nice deal, for him. Wonder what made him change his mind about the privatization. No need to wonder why bankers liked the deal.

Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and $37 million, respectively. But those banks played both sides of the deal: they also lent Mr. Zell the money to buy the company. For that, they shared an additional $47 million pot of fees with several other banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing the deal, for which it was paid a $7.5 million fee (plus an additional $2.5 million advisory fee).

Merrill is now owned by BofA, which got $25 billion of US capital. Citi got even more billions so it would not implode. Both got fees, then lent money for the deal to go through. And Morgan did fine, too. But, how is the advisory fee earned by a firm that writes a “fairness opinion”?

On top of that, a firm called the Valuation Research Corporation wrote a “solvency opinion” suggesting that Tribune could meet its debt covenants. Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for that opinion. V.R.C. was so enamored with its role that it put out a press release.

Thus, at least $131 million in fees was paid by the Tribune Company so Zell could borrow money and short the workers's pension fund to acquire the company.

But what about those employees? They had no seat at the table when the company’s own board let Mr. Zell use part of its future pension plan in exchange for $34 a share.

They don't count.

For Treasury, Geithner Said to Be Choice; Wall St. Cheers

I was rooting for Geithner. Summers's brilliance can't be denied, nor will it be wasted, but Geithner is a magnificent choice. Same age as Obama (though at 53, merely 6 years older than the other two, Summers can hardly be called old), he has attributes which work: he has a great deal of experience (a Summers protege from the days Larry worked for President Clinton; president of the New York Fed); Wall Street likes and respects him; he represents continuity; and he represents change. Brilliant choice.

A phrase jumped out at me from the story on the Times website this evening; the article discusses the influence and protégés of Robert Rubin (Treasury Secretary under President Clinton, Goldman Sachs alum, centrist):

Michael Froman, Mr. Rubin’s former Treasury chief of staff and Mr. Obama’s classmate at Harvard Law School, is heading the economics personnel search for the transition. Mr. Froman’s head-hunting deputy is Mr. Rubin’s son, James Rubin.

Obama's Harvard Law classmate; Rubin's former chief of staff. Obama is part of the nation's elite by virtue of his Harvard Law degree, and he's tapping his network for his transition and Administration, as he tapped it for contributiond and support for his candidacies.

More and more it becomes apparent that Obama is center-left, the emphasis on center, and not left of it; that he has extensive contacts, and that his organizational skills are superb. That is one of the details that impresses me most: his campaign for the nomination, his campaign for the Presidency, and his transition and Cabinet-building, are all prime examples of magnificent organization.

Palin derided Obama's experience as a community organizer, and some of the masses responded lustily to the insult: community organizer was used as code for black, urban, and poor, as well as liberal, means to insult the urban poor and those who work to help them, liberal intellectuals.

Clearly the ability to organize efficiently is being shown to be a valuable skill. In his campaigns, and now in his transition to the Presidency, Barack Obama is showing his mettle.

Yet it is not only the Republican right wing that derides centrist Rubinism, to coin a term.

The Rubin wing of the Democratic Party has long been disparaged by liberals and union leaders as being too concerned with balanced budgets and free trade. But much of the ideological tension in the party has dissipated as the economy has weakened, and Mr. Obama has signaled that he intends to spend what it takes to get the economy back on track.

What Obama is showing is pragmatism. Yes, he tends to move to the slight left of center on some issues, to the left of center on other issues, but his imprint is clear: what works is what will get done.

Mr. Geithner also seems to fit Mr. Obama’s emphasis on “post-partisanship.” Associates say Mr. Geithner is an independent, though he was a Republican when he first was a staff member at the Treasury Department in the late 1980s under Presidents Ronald Reagan nd George Bush. After college, he worked in the New York-based international consulting firm headed by Henry A. Kissinger.

There are those associates again. But I do declare that Gaithner greatly impresses me.

After leaving the Treasury Department, Mr. Geithner worked at the International Monetary Fund until he was hired in 2003 as president of the New York Fed.

How does someone just get hired as the New York Fed President? He must have had some resume. I think highly of him, and think his appointment continues a strong record for the Obama transition of competency, even brilliance (see Clinton, Hillary Rodham).

Larry Downing/Reuters

Timothy F. Geithner of the Federal Reserve Bank.

Chip Somodevilla/Getty Images

Lawrence H. Summers might become a senior White House adviser instead of returning to the Treasury Department.

Bankruptcy vs. Bailout

New TARP unfurled

Give him enough time, and enough tries, and Paulson might eventually get it right. Best thing that can happen is that Paulson goes back to the private sector.

Treasury Secretary Henry Paulson laid out details for the next stage of the government's financial-market rescue package Wednesday, announcing he has shelved the original plan to buy troubled mortgage assets while turning his attention to non-bank financial institutions and consumer finance.

Wait, I meant to say ..

Porsche Engineers a Financial Windfall

A potato-farming CEO and a Kafka-reading CFO engineer a stunning financial gain, playing the system, and outwitting hedge funds. The gains have been enormous. Hedgies got caught in a short squeeze, having taken big bets that VW stock would fall in value, and that they would reap huge gains. They were wrong, and lost big. Now they are crying foul. Porsche, meantime, is counting its money.

Porsche's profits on those trades totaled more than the current combined market values of beaten-down General Motors Corp. and Ford Motor Co. The outsize gains were scored by a potato-loving chief executive and his Kafka-reading chief financial officer. They teamed up with the offspring of the Beetle creator to engineer an audacious takeover bid – and outfox hedge funds at their own game.

Porsche made €8.57 billion euros, or about $10.9 billion in its just-ended fiscal year. 80% came from trading in options on VW stock. In Germany there is an instrument called a cash-settled option, which allows the option buyer to get cash, and not stock, when the option is settled. There is no requirement for the cash-option buyer to file regulatory notice of how much it owns. What Porsche did was to use the system to its greatest advantage: when hedge funds do such things their critics call it market manipulation and hedgies defend themselves by saying they are not doing anything illegal, simply using the system's rule to provide market liquidity.

Porsche's moves point to the resilience of Deutschland AG, the decades-old network of elaborate cross-holdings that kept companies in domestic hands but had been unraveling. Porsche's VW chase is a kind of corporate German reunification drama: Wolfgang Porsche and Ferdinand Piëch, the board chairmen of Porsche and VW, respectively, are grandsons of Ferdinand Porsche, who created the VW Beetle and founded Porsche before World War II.

The European Union does not allow for such nationalistic rules, aiming to break such down for the creation of a continental whole.

In April 2005, Franz Müntefering, the chairman of the then-ruling Social Democratic Party, called non-German financial investors "swarms of locusts" that land on companies and "strip them bare." Wendelin Wiedeking, Porsche's combative CEO, chimed in, telling a newspaper that Germany needed to stick to a "social market" economy that avoided putting shareholders' interests before those of customers, employees, and suppliers.

It is a matter of values, different ways of looking at things. In the US, shareholders's rights is held up as a core value and a most important way of making the free market work. Such are diametrically opposed to what Wiedeking calls the social market.

Mr. Wiedeking had helped steer Porsche out of trouble after taking the wheel in 2003 and pushed profit margins to industry highs. He slashed about a fifth of the work force and imported Japanese-style lean-inventory methods. Once, to drive home the point, he strode across a factory floor and smashed shelves bulging with spare parts. Mr. Wiedeking cultivates a populist persona, even as Porsche sells pricey cars such as the 911. The 56-year-old executive owns a working-class tavern and a small farm, where he harvests potatoes with the help of an old Porsche tractor, distributing sacks of potatoes to employees.

It is unimaginable that the CEO of a big US company would do such a thing. Porsche makes 100,00 cars a year, VW 6 million, yet Porsche has a name vastly larger than the physical size of its production level.

In September 2005 Porsche surprised investors by announcing it would buy a 20% stake in VW, becoming its biggest shareholder in a "German solution" that would avoid any foreign takeover. VW and its home state of Lower Saxony, which held a bit under 20%, welcomed the move by Porsche – which, significantly, didn't signal that it was interested in a majority stake.

Porsche can, perhaps, legitimately say that it was not then interested in a majority stake. Who can prove otherwise?

Behind the scenes, Porsche Chief Financial Officer Holger Härter was crunching numbers. An economist, Mr. Härter had joined the company in the 1990s after Mr. Wiedeking recruited him from a floor-products firm in a town where they both lived. Mr. Härter is known as a fan of Franz Kafka and Ludwig II, the 19th-century Bavarian king whose fanciful castles inspired Walt Disney. He also is the chairman of Stuttgart's derivatives exchange, and in the 1990s he developed sophisticated models to hedge Porsche's foreign-exchange exposure.

Härter knew his finances. An economist, chair of a derivatives exchange, a financial wizard.

Porsche began buying cash-settled options tied to VW stock in 2005, when VW's share price was below €100. If the price rose, Porsche could exercise the options and receive the difference between the lower strike price and the higher market price. It could then use the money to buy VW shares.

Porsche began buying cash-settle options. If it made money it could use it to buy more VW shares or options. That is investing at its best: using profits, not capital, to do more investing. Cash-settle options have one other important twist: Banks that underwrite them typically hedge their exposure by holding actual shares. That takes these shares out of circulation.

That completes the circle: shares underlying cash-settle options are set aside by banks that lend the money for the options, lessening the total number of shares in public float. As Porsche was buying cash-settle options on VW stock, the number of shares of VW available publicly went down.

By March 2007, Porsche had boosted its stake in VW to 30%. That triggered a German rule requiring it to make a full tender offer for VW shares. The company said it wasn't interested in a takeover of VW. Forced to make a tender offer, Porsche offered the legal minimum price the law let it offer, which was €100.92 for each voting share. Only 0.6% of the remaining VW shares were tendered.

Expert move: Porsche said it didn't want to buy VW, and the market believed it. The tender offer didn't work, something which, in retrospect, would prove to be what Porsche wanted.

That November, Porsche announced that for the fiscal year ended July 31, 2007, it had booked a pretax profit of €5.86 billion, including €3.59 billion from "the very positive effects" of VW options. Compensation for Porsche's six-person management board more than doubled, to €112.7 million. Mr. Wiedeking pocketed more than half of that.

So the social market did not prevent the CEO from making more than 50 million Euros. A nice enough payday.

This past March, Porsche's supervisory board gave the green light to take the VW stake above 50%, and this goal was announced. For the six months ended Jan. 31, Porsche disclosed a pretax profit that included €850 million from "hedging transactions in connection with the acquisition of the VW stake." But Porsche denied growing talk that it was gunning for 75% of VW. In a news release, the company said the possibility of that was "very small indeed" and dismissed it as "speculative mind games of analysts and investors."

Porsche owned 30% of VW, and made another 850 million Euros in profit on VW options.

In mid-September, Porsche disclosed it had raised its VW stake to just above 35%. At the Paris Auto Show in early October, Mr. Wiedeking told reporters a 75% stake was a "purely theoretical option." On Oct. 24, a Friday, VW's share price closed at €210.85 on Frankfurt's stock exchange.

Another 5% of VW added. Porsche had begun to buy VW stock when its price was under € 100; by now it was more than twice that. Note the difference in language of Wiedking's statements: from a "very small" possibility of Porsche going for 75% of VW stock, it went to a "purely theoretical option."

On Friday October 24, VW stock was €210.85.
On Sunday October 26, Porsche dropped a bombshell.
On Monday October 27, all hell broke loose.

Porsche's bombshell: In a news release, the company disclosed that it owned 42.6% of VW's shares as well as cash-settled options linked to an additional 31.5% of the shares. Porsche also said that it planned to acquire a 75% stake in VW.

All hell broke loose: funds that had borrowed VW shares and sold them, expecting no takeover offer and betting the stock would decline, raced to purchase shares to unwind the bets. There weren't enough to go around. Part of the reason is that underwriters of cash-settled options typically hedge their risk by owning the shares of the company involved. The shares they owned, combined with those Porsche had acquired, added up to 74.1%, and Lower Saxony state owned 20.1%The result was that while some 12.8% of VW shares were on loan, mostly to short sellers, those that for practical purposes were in circulation amounted to only 6% of VW shares.

74% of VW shares were owned Porsche and banks hedging their lending for cash-settle options, 20% by Lower Saxony, leaving 6% in public float. Yet there were short sales for nearly 13% of VW total stock, meaning 7% of VW stock sold could not be replaced. Little wonder all hell broke loose.

As hedge funds fought for the remaining VW shares, they drove the stock's price ever higher – deepening their losses. At the height of the short squeeze on Oct. 28, VW stock briefly topped €1,000, nearly five times as high as on Oct. 24, making VW the biggest company by stock-market value for a few hours.

Porsche had begun buying VW stock at less than € 100. On Friday the price settled at € 398.21 in Frankfurt.

How Porsche did it, and exactly what it did, are now matters of speculation. Some investors complain that Porsche and Schaeffler have crossed the line of fair play, taking advantage of disclosure rules that are too loose and regulators that are too tentative.

Schaeffler is a German auto-parts supplier pursuing a campaign similar to Porsche's (aimed at Continental AG).

"We need a different approach, with efficient supervision,'' says Christian Strenger, a board member at DWS, the asset management arm of Deutsche Bank AG, Germany's biggest financial group.

When financiers win, they call it the free market at work, and label their actions advantageous for the free market's liquidity; when they lose they call for a different approach, and even for efficient supervision.

Oy.

A financial casulaty

A sad story. A casualty of the financial meltdown. A man who worked for Bear Stearns, learning he would not be hired by JP Morgan Chase, chose to end his life.

Barry Fox, a research supervisor who worked for nine years at the brokerage firm, took a drug overdose and then jumped from his 29th-floor apartment the evening in May after he learned he wouldn't be hired by J.P. Morgan Chase & Co., which was about to buy his firm. A coroner recently confirmed in an autopsy report that the death was a suicide.

Part one | Part two

Mr. Fox, who was 51 years old when he died and had for years struggled with physical and mental disabilities, joined Bear Stearns in 1999 after stints at several other firms. He excelled in Bear Stearns's close-knit culture, associates say. Shortly after arriving, he began working as a “supervisory analyst,” vetting and approving research reports before they were disseminated to the public. In 2002, Mr. Fox was named managing director, a senior position. Mr. Fox's pay soon swelled to as much as $250,000 per year, says the 66-year-old Mr. Philippi.

Fred Phillipi was his partner. When Bear went under, the pressure intensified.

It was a grueling time for Mr. Fox, say associates. On May 1, he emailed Joanna Barouch, a childhood friend. “I've been in my own world over the past month or so since Bear Stearns went under,” he wrote. “I should know in a few days or a week or two whether I'll be going over to J.P. Morgan Chase. I have a chance but not a great chance – there are many applicants and few openings.”

The pressure can be unbearable; I've been through similar circumstances. He was not hired.

Despite years of hard work, he says, without adequate savings, Mr. Fox “still felt he had nothing to show for it as he went into his 50s.”

October Pain Was 'Black Swan' Gain

Not everybody lost money in October.

Separate funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. "We're discovering the fragility of the financial system," said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

I can only dream of making that kind of return at any time, let alone in one month.

Nassim Nicholas Taleb wrote a book entitled The black swan: the impact of the highly improbable, in which he wrote about black swans.

Argentina's pensions

La Presidenta is trying to get her hands on private pension monies to bail out her government.

Congress has yet to approve Argentine President Cristina Kirchner's move to seize $28 billion of retirement savings to fund her cash-strapped government, but already the plan has produced a thicket of problems. One troubling reaction: Argentines are cashing their peso bank accounts and lining up to buy dollars at crowded exchange houses. The peso fell 7% last month, prompting the central bank to spend at least $1 billion to defend it.

Memories of the 2001 crisis remain.

Many view Mrs. Kirchner's pension move last month as a sign of desperation that could presage other unorthodox policy decisions. Memories of the government's decision to freeze deposits during the last crisis are still fresh.

Aside from Argentinians themselves, others are troubled (that is, scared) be Cristina's reaching for the pensions.

Mrs. Kirchner's plan has stirred trouble outside Argentina as well. This week, a U.S. judge froze up to $1.6 billion held in the U.S. by the Argentine pension funds that Mrs. Kirchner is hoping to nationalize. U.S. bondholders are suing to recover money they lost when Argentina defaulted during the last crisis. Mrs. Kirchner had ordered the pension funds to repatriate overseas assets ahead of the nationalization.

Nice and subtle, eh? Repatriate it, and then it'll be nationalized.

Argentina ran out of money in 2001 and committed history's biggest sovereign-debt default. The commodity boom brought a brief recovery, but the boom is over, and left the nation saddled with debt. Faced with at least $11 billion of debt payments next year, Mrs. Kirchner wants to raid the accounts to avoid defaulting while maintaining politically sensitive welfare payments, analysts say.

Pork-barrel, earmarks, call it what you will, it's a global practice.

Argentina's privately managed pension system was set up in the mid-1990s, and the accounts were devastated in the 2001 crisis. Mrs. Kirchner says she is nationalizing the accounts to protect them from market volatility.

O, right: gimme the money, I'll protect it. Does a bridge come along with it?







Employees of private pension companies protest the government's plan to nationalize pension funds in Buenos Aires last week. President Kirchner defends her plan as a way to protect money from the global financial crisis.

A Question for A.I.G.: Where Did the Cash Go?

So, where's the money?

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

Oops.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz. Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

There must be some sort of explanation; why isn't it provided, or revealed?

These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say. “When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.” A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

AIG won't say anything before releasing its numbers, and the Fed isn't forcing its hand?

Rate of Nuclear Thefts

Mohamed ElBaradei, the chief of the International Atomic Energy Agency, said in a speech on Monday that the number of reports of nuclear or radioactive material stolen around the world last year was “disturbingly high.”

Just when one thought things were stabilizing some, this comes along. What the hell is disturbingly high? This is nuclear material. Stolen. Who got it? Who had it?

nearly 250 such thefts were reported in the year ending in June.

Members of Dr. ElBaradei’s staff and outside experts cautioned that the amount of missing material remained relatively small. If all the stolen material were lumped together, it would not be enough to build even one nuclear device, they said.

Maybe not one conventional nuclear device, but what if the thiefs, or those who bought the stuff from the thiefs, put it to use other ways?

Financial turmoil

Denmark is among the many nation beset by the fall out of the US mess.

Denmark's central bank Friday raised its key policy rate for the second time this month to prop up the country's struggling currency as the global financial crisis continues to wreak havoc.Danmarks Nationalbank said it increased its key lending rate and the interest rate for certificates and deposits to 5.5% from 5% "as a result of continued intervention to support the Danish krone." Thursday, Sweden surprised markets with another half-point rate cut to 3.75%.

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Swedish bailout

Sweden has experience in financial rescue plans (bailouts).

Sweden, which created a model for rescuing troubled financial systems in the early 1990s, became the latest European economy to introduce a sweeping bailout plan to support its banks. Under the Swedish plan, the state could guarantee some $200 billion in bank debt – half the nation's gross domestic product. It also will create a facility to inject capital into banks that get into trouble. Finance Minister Anders Borg said in an interview that he expects all of Sweden's banks to take advantage of the guarantee, though bankers said it was too early to say what they would do.

50% of GDP is a staggering figure, at first.

The CIA World Factbook has Swedish GDP as $338.5 Billion for 2007 (purchasing power parity; $455.3 billion in official exchange rate). The figures for the US are $13.78 trillion and $13.84 trillion.

On reflection, though, 50% of the US's GDP would be about $6.5 trillion. Begin with the monies used to rescue Fannie Mae and Freddie Mac (over a trillion, one and a half?), add $130-plus billion for AIG, $700 billion for the bank bailout, and that adds up to 2.3 trillion. That would seem just the beginning. Indeed, add $540 billion of aid to the mutual fund industry.

There are uh-ohs all over the map here. In Sweden, the first uh-oh is that pony tail on Minister Borg. What is up with that?

Swedish Finance Minister Anders Borg, left, and Swedish Capital Market Minister Mats Odell speak at a press conference. Mr. Borg said he expects all of Sweden's banks to take advantage of the bailout plan.

Interestingly, Sweden has both a Finance Minister and a Capital Markets Minister.

Mr. Borg and other Swedish officials said the measures aimed to restore confidence, and weren't a reflection that any institution was in immediate peril. There was also an element of peer pressure, the officials said; they didn't want to leave the Swedish banks without government support while competitors in other nations accepted helping hands.

"Everybody should be doing this," said Mr. Borg, urging other countries to stand behind banks because the more they did so, the more credible Europe's determination to stanch the financial crisis would be.

Bush and Paulson and Bernanke were too late in acting. Better to act early.

Sweden has faced financial crisis before. After a long period of low interest rates and lax supervision led to a surfeit of questionable loans, Swedish property prices plunged in the early 1990s and five of its seven biggest banks sought capital injections. Sweden guaranteed its entire banking system, insuring creditors and depositors – but not shareholders – against losses and eventually doled out state aid then equivalent to 4% of the nation's GDP.

Swedish authorities used the old laws from its 1990s financial crisis as a template for Monday's plan. "We learned then that the pillars of any solution are, first, to restore confidence in the financial sector, and second, to recapitalize the banks, if needed, to minimize the credit crunch," says Bo Lundgren, who now manages Sweden's debt agency, which will administer several portions of the new bailout package. Mr. Lundgren was minister for fiscal and financial affairs during the prior crisis. "These two things you have to do if you want to minimize the eventual cost to the taxpayers."

Of course, they're socialists, no? Utter nonsense.

Analysts and officials argue that Sweden's 1990s plan made the country's economy and banking system more resilient. Swedish banks, for instance, largely skirted the U.S. subprime-related investments that started the current turmoil, thanks to stricter in-house management and supervisors' sensitivity to portfolios that were heavy on risky bets.

Strict management and supervision: what magnificent ideas. Practical, too.